The words “tax credit” are heard so frequently and yet, there are many individual taxpayers who possess minimal knowledge of what those words mean and the impact they have on an economy. The official definition of tax credit is a certain amount of money that may be offset against tax liabilities. In layman’s terms this means that the amount of tax dollars owed is reduced by the dollar value of a tax credit. A repatriation tax is identified as a tax that is paid by corporate owners of businesses located in foreign countries. The IRS reports show that the number of U.S. Corporations operating in foreign countries expanded from 2000 to 2004. In those years, foreign tax credits on U.S. businesses increased from 18.2 percent to 19.0 percent. Note that in order to be eligible, the income must originate from foreign sources. (Ref. //www.irs.gov/pub/irs-soi/historycfcftc.pdf).
Impact of Repatriation Tax Credits
It should be remembered all tax credits reduce the amount of taxes paid to the federal government by individuals and corporations. While it may appear at first glance to be an advantage to offer a Repatriation Tax Holiday, evidence proves the actual impact has a negative effect on the U.S. economy. In 2004, for example, “15 companies that benefitted the most from a 2004 tax break for the return of their overseas profits cut more than 20,000 net jobs and decreased the pace of their research spending. The cost was $3.3 billion,” according to the Democratic Staff report of the Senate Permanent Subcommittee on Investigations report of the Wall Street Journal report of October 2011 (Ref. //www.wsj.com/articles/SB10001424052970203633104576623771022129888).
The Pavlov Effect of a Repatriation Tax Holiday
In reality, a Repatriation Tax Holiday may be like Pavlov’s dog to Wall Street investors will that react immediately to reductions in their tax liabilities. In terms of actual economic growth, a Fortune Magazine study of the 45th President of the U.S.’s plan for a one off Repatriation Tax Credit, Goldman Sachs reports that only $200 billion of the $1 trillion in cash held outside the U.S. (//fortune.com/2016/11/24/donald-trump-repatriation-tax-plan-jobs/)
“Corporate profits on overseas operations will be reduced, but with demand weak and current profits under downward pressure, the repatriated earnings are likely to go into financial rather than physical investment,” Van Hoisington and Lacy Hunt of Hoisington Investment Management wrote in a note to investors.” (Ref. //fortune.com/2016/11/24/donald-trump-repatriation-tax-plan-jobs/). Thus, it appears that the true impact of a Repatriation Tax Holiday is of greater benefit to Wall Street investors and little benefit in terms of job creation.